Merck and Novartis rumored to swap assets

Rumors that Novartis and Merck may be looking to swap businesses have added a new angle to the 2012/2013 trend of breaking off animal health businesses into independent entities or the equally straightforward asset sale.

Insiders tell Bloomberg that a deal in which Novartis would hand over its animal health business in exchange for Merck's OTC portfolio, but company spokespeople have not confirmed. Regardless, the possible swap is not a new strategy—Bernstein analyst Tim Anderson wrote in his January 9 research note that his team asked Novartis about this very scenario during a 2013 Strategic Decision conference, and was given a very solid “no.”

Novartis has been seeking to unload its animal health business for a while, and Merck is not the only company that could benefit: Leerink Swann's Seamus Fernandez wrote earlier this week that Lilly could up its value by scooping up the Swiss drugmaker's animal business.

As for how this move could benefit the two companies, it looks thematically sound on paper, but Anderson writes that there are a lot of unknowns at play, such as how profitable each of these businesses is. He also reminded investors that branded pharmaceuticals are the “core focus and profit driver” of each of these companies and that rearranging assets would “tidy things up a bit but does not trigger any sort of major shift in fundamentals.”

Anderson also expects financials for both companies will be flat for 2013. His write-up also shows the analyst is somewhat underwhelmed by the immediate futures of each company. He writes that Merck's immuno-oncology effort, MK-3475, is something to get excited about, but as he's noted before, the company has a small oncology footprint, which adds a degree of “development and commercial execution risk.”

As for Novartis, Anderson describes the company as “a decent R&D organization,” one that is well positioned for the biosimilars market, but that that the company “has yet to have any outsize, well-above-expectation quarters.”